It’s good to share, but is it good for business?

What is the sharing economy?

Essentially, the sharing economy is built on the idea of distributing resources, but outside of traditional business models. The sharing is between private individuals rather than from a business direct to a consumer. As more businesses try to embrace this model the concept of the sharing economy has become muddied. A platform like Airbnb facilitates sharing. But what about Uber? It portrays itself as part of the movement, but in several regions its drivers are suing to be recognised as employees — and they’re starting to win.

It’s thanks to technology that the sharing economy has really taken off. People can now access products and services in entirely new ways — they’re no longer reliant on the often rigid options available from conventional businesses. Why own a car that will sit idle 90–95% of the time? Instead share one with others in your local community through apps like SnappCar and Aimo.

And you can even share things you might not expect. Need an outfit for a special occasion? You can now borrow one. This can be significantly cheaper than using conventional models, say renting a suit from a dedicated store for a wedding. It’s no wonder the sharing economy is predicted to generate the same revenue as businesses using a traditional operating model by 2025.

PwC predicts that by 2025, businesses that are based on a sharing economy model will generate revenue of US$355 billion — that’s as much as businesses using a traditional operating model offering similar services.

What are the benefits?

The sharing economy potentially offers huge benefits — not just for consumers, but for the companies offering, and using, these services, and even society itself. That’s not hyperbole, the more resources we’re able to share, the less of an impact we have on the planet. Manufacturing can be reduced, which means we can reduce pollution and preserve natural resources. And the fewer cars on the road, the better.

And that environmental impact is a significant driver for consumers, particularly millennials who are now the biggest generation group in society. Not only are they more conscious of their impact on the environment, but they’re infamous for their limited spending power. Being able to rent rather than buy opens up a whole new world of opportunities for this market. They may not be able to afford a couture gown, but could afford to hire one for a weekend.

The sharing economy isn’t just creating new possibilities in the B2C space but for B2B too. Servitisation is where businesses rent services from other businesses rather than owning them outright. It’s a way for businesses to transform for the future and challenge incumbents. And those already adopting it are seeing service revenue 30% higher than their peers.

“As a service” business models are giving businesses greater flexibility and agility. Businesses can avoid capex outlay and scale, up or down, as needed. There are examples of manufacturing companies renting out their tools and equipment when not in use, defraying the cost of expensive equipment. Businesses are no longer limited by their immediate resources and can quickly adapt to their changing needs — and those of their customers.

What does this mean for the finance function?

Businesses are changing, and so are their financial needs. With so many working from home, it doesn’t make sense for businesses to pay for an office space 365 days a year. Instead businesses are renting office space as and when they need it. And that’s only one example. The number of things businesses no longer need to own is only going to continue to grow from computer system resources and software to entire departments like HR and finance.

Swapping to this more flexible as-a-service approach, can reduce the barriers to setting up new ventures. As businesses reduce their capex requirements, money can be freed up for investments. This could fuel more startups and encourage businesses to innovate and try something new.

For the companies offering as-a-service models, shifting business models can present short or even medium-term cash flow challenges. Companies will need to optimise their use of cash and maybe even look for alternative funding to cope with the transition. Adopting direct-to-consumer, pay-as-you-go models, will require more user-friendly, scalable payments solutions.

What can banks do to help?

To avoid becoming irrelevant, traditional banks need to show that they can be disruptors too. This will require embracing new technologies to serve customers in new ways – such as chatbots, mobile banking, and other online services. They will also have to show businesses how they can not only provide services, but also support innovation and provide valuable expertise.

“This new economy and business model leaves two fundamental questions open: trust and liquidity”, says Ville Sointu, Head of Emerging Technologies at Nordea. As businesses continue to share assets on a pay-per-use basis, it changes the relationship. Those relying on the services must have trust not only in the services, but in the brand delivering them. Will the provider continue to honour its agreement? Will it still be around in the future to do so? “This puts banks in a unique position. We’re already trusted in a number of areas, and now we can extend that into a wider space. We can act as the trusted intermediary between the businesses offering, and those using these as-a-service models.”

One way banks can help guarantee outcomes is to use digital contracts that define charging based on data from Internet of Things (IoT) sensors. These sensors can measure the usage of a shared asset, such as a vehicle, a robot, a welding machine, or office space — how long it’s been used for, how far it’s travelled, or whatever is appropriate for that asset.

“These digital contracts use predictive analytics to help banks provide more accurate financing risk assessments.” Sointu says, “That enables us to offer more accurate, and cheaper, options for taking the equipment off the service provider’s balance sheet. As the sharing economy becomes more widespread, it’s going to be vital that businesses can afford to keep up.”